The La Marca model revisited: Structuralist goodwin cycles with evolutionary supply side and balance of payments constraints

Abstract

This research is aimed at investigating the causes of volatility that affect middle-income countries by studying the La Marca model. Drawing from the open-economy Goodwin tradition, this model demonstrates that economic activity, income distribution and accumulation of foreign assets dynamically interact, resulting in a pattern of dampened cycles. The study consists in analyzing the characteristics of the model by initially imposing: (I) a constant real exchange rate; (II) a constant net external asset to capital ratio, which is in line with the balance of payments dominance theory and (III) a fixed income distribution. We then (IV) expand the original model by adding an evolutionary supply-side in which productivity is at the center of the economic dynamic through international technology transfer and the Kaldor-Verdoorn effect. The results show that (1) the model always converges. (2) The restrictions (I) and (II) remove the cyclical component of the model, which highlights a central difference between La Marca and the original Goodwin model. (3) Fixed income distribution leads to a monotonic trajectory that reduces oscillations. (4) The inclusion of productivity dynamics generates new sources of volatility in the relationship between productivity, capacity utilization and net external assets and is in line with the structuralist argument of structural fragility.